World View & Market Commentary. Forest first; Trees second. Focused on Real & Knowable facts that filter through the "experts" fluff and media hyperbole. Where we've been, what the future may hold and developing a better way forward.

Friday, October 22, 2010

Equity futures are higher this POMO day, with the dollar slightly lower, bonds dropping like a stone in price, oil stubbornly higher and above $80 a barrel still, and gold is down further in its correction.

There is no significant release of economic data today, just a significant release of the people’s dollars to the banking criminals in exchange for their fraudulent “assets.” Next week’s big data release will be massaged attempt #1 in attempting to convince you that a rapidly deflating economy is actually growing – in other words Q3 GDP. Only when measured in dollars – same goes for the stock market.

The long bond’s price action looks very bearish. However, there is a large triangle that may have formed, and if so we are near support on that now. I’m watching this lower trendline to see if it holds or if it breaks:

There was a small move in the McClelland Oscillator yesterday (it’s still negative) which means we can expect a large price move in equities either today or tomorrow.

Yesterday there was yet another flash crash in the markets, only this time it was up which makes it a flash smash. Of course when prices flash to the downside they immediately step in and reverse the trades – not so when prices flash up, here’s a snippet from ZH on what happened:

Today's flash smash comes courtesy of microcap company LiveDeal (Nasdaq: LIVE, market cap around $3 MM) where thanks to a rogue (presumably - there are no news in the name) algorithm the stock shoots up from an opening price of $4.79 all that way to $22.25 in about one minute: a gain of 365%, which is too rich even for KKR's new prop group. And no, this is not a fat finger as the QR screen below shows: the algo was busted enough to lift every single offer in a row - there were virtually no downticks for the span of over 15 seconds. The result: 1,679 shorts end up with an almost 400% loss (one of the benefits of unlimited downside shorting). And as the stock has very little liquidity it is very likely that assorted brokers took matters into their own hands and force covered all those who were underwater and losing substantially. And the cherry on top: not a single trade has been busted. In other words, exchanges are more than happy to unwind trades immediately when an algo loses money, but when an algo creates thousands of forced buy ins and retail investors are left with huge losses, then no luck on the DK. What is scariest is that HFT has now gone microcap: with Apple, Amazon, BofA and Netflix bled dry, it is about time the robotic scalping crew found new pastures.

In other words, what’s happening is that the crooks are manipulating the price of the stock, plain and simple. They belong in jail, but they are obviously above the law. Thus the breakdown of the rule of law is again on public display, yet another blow to confidence in the “market.” Again, it’s not a market, it’s a simulation designed to separate you from your money.

Meanwhile the politicians act as if they are helpless. Still no adults to be seen…

Foreclosuregate is the real deal, make no mistake. It is simply another way of uncovering the true nature of the banks health, a continuation of the cancer that is metastasizing. There are severe moves directly ahead. When the banks are threatened, they will lash out. They will get their way or they will take the markets and the economy down – the direct result of the failure of the people to maintain control over their own money system. There is simply NO WAY to fix and to repair all the damage done to the property ownership trail. Thus there is going to be a push of some type to blanket cover it all up. My best guess would be that the criminals push the government to directly refinance as many mortgages as possible with the government guaranteeing title. This, of course, will simply be another crime against the people, but it will be spun and cloaked in the mask of lower interest rates and the hapless public will gladly go along for the lower monthly payment, debt saturated, bankrupt nation ride. Hell yeah, I want my 2% loan and I want it now!

As I look at the price action yesterday and at the candlesticks of the past two weeks, all I see is a market that is in the same exact position as it was prior to the May flash crash. Every candlestick looks like a top. Every attempt for prices to decline is met with some new scheme – some “Fed” lackey flaps his or her gums, a POMO comes in to provide billions to the criminals, the data comes in massaged, something, anything as long as the market doesn’t do its job of true price discovery. CLINK! Goes the can. Call me your “educated eggdicator.” I simply await the inevitable.

Thursday, October 21, 2010

Equity futures are higher this morning, the dollar is lower but regaining strength after some wild gyrations overnight in most of the currencies. Bonds are slightly higher, oil and gold are lower.

While I’m mentioning oil and gold, I want to point out that yesterday’s rally in stocks was entirely on the back of a large drop in the dollar. What was peculiar about that drop in the dollar is that this time particularly gold did not respond as it had been, nor did it respond as strongly as equities. This is further evidence that the quality of the rally was not near the quality of the prior day’s decline. The lack of volume on up days is another tell.

That rally seemed to me to say that it’s okay to PRETEND that there are no problems, the “market” is happy with that. We had Sheila Bair pronounce that foreclosuregate was a “paperwork” problem that we can get through, and we had banks like Wells Fargo saying that they are confident everything is in order. This is complete BS, they cannot react any other way because they know that this problem kills their businesses and agencies dead. The entire securitization process was nothing but FRAUD put upon Americans.

And what disgusts me is reading analysts who talk about homeowners as if they are trying to scam the system because they would prefer to have their loan balance reduced over having interest rates reduced. No kidding, perhaps that’s because they are victims of FRAUD perpetrated by the banks? People need to wake up and simply refuse to play the game if they were caught in the bank’s web. That’s exactly what any one of them would do if caught in the same situation. The rule of law has already broken down on many levels and over the course of many years, and our government is refusing to enforce it – therefore you are compelled to act on your own and on behalf of your country.

And while I’m pointing out the inherent conflict with the “Fed” being owned by Bank of America, this is the conflict pointed out by the mainstream:

Oct. 21 (Bloomberg) -- The Federal Reserve Bank of New York’s effort to recover taxpayer money used in bailouts during the crisis may be at odds with its mission to ensure the stability of the financial system.

The New York Fed, which acquired mortgage debt in the 2008 rescues of Bear Stearns Cos. and American International Group Inc., joined a bondholder group including Pacific Investment Management Co. that aims to force Bank of America Corp. to buy back some bad home loans packaged into $47 billion of securities, people familiar with the matter said this week.

Concern that Bank of America may be forced to buy back soured mortgages helped send its stock down almost 5 percent in the last two days, wiping out $5.92 billion of its market value. The decline runs counter to the Fed’s goal of strengthening the banking system after the worst crisis since the Great Depression.

“This is an inherent conflict,” said former Atlanta Fed research director Robert Eisenbeis, now chief monetary economist at Cumberland Advisors Inc. in Sarasota, Florida. “They’re transferring the loss from what would have been Bear Stearns through the Fed to the originators of the mortgages. That’s an odd chain, and I don’t know how you manage that.”

…The Fed has no choice except to shield the assets it acquired as it stepped in to prevent a collapse of the financial system, said Joseph Mason, a finance professor at Louisiana State University in Baton Rouge. “The New York Fed is, acting along with other institutional holders, trying to preserve the value of their securities holdings,” Mason said. “To act otherwise would be inappropriate and would be viewed as a waste of the government’s money that was invested in this bailout.”

What bull. The Fed could care less about the crap they have exchanged with the banks. What they care about are the banks – period. The banks ARE the "Fed" and visa versa. The “Fed," and by extension the banks that comprise the "Fed" are DEAD, they just won’t admit it yet.

And so we pretend. We pretend that it’s just “paperwork,” we pretend that we still have “markets” when in fact what we have are contrived banker owned and controlled machines designed to further pluck the pockets of the same saps who are already victims of the bank’s fraud, most of whom don’t even know they’ve been had.

But hey, jobless claims are down to “only” 452,000 in the past week if you can believe that. What’s that, you don’t believe it? That’s good, because revisions from the week prior added on another 13,000 from what was previously reported. How many more do you figure they’ll add onto this week, and why are all their errors in the same direction week after week? And let’s make this clear, any number above 350k is a complete and total disaster. Here we are years into structural declines in employment and people still haven’t figured out the structural nature of debt saturation – saturation that was put on the people via way of the bank’s fraud. Here’s Econoday:

HighlightsA big 13,000 upward revision to the prior week more than cuts in half the 23,000 decline in initial jobless claims for the October 16 week. Still, the results are positive with the four-week average down 4,250 to 458,000, more than 6,000 below the month-ago comparison for its lowest level since July.

Continuing claims are at their lowest level of the recovery, down 9,000 in data for the October 9 week for a four-week average of 4.478 million. Improvement here reflects new hiring and, unfortunately, the expiration of benefits as workers fall out of the insured pool. The unemployment rate for insured workers is unchanged at 3.5 percent.

Today's data are free of distortions and point to incremental improvement in the labor market. There was no initial reaction to the results.

Same old range. So let’s pretend that there are not millions of people of people who are not even counted anymore. Let’s ignore the 4 million+ people who are drawing Emergency Unemployment, up 152,112 in the last week.

So called “Leading Indicators” and the Philly Fed Index are released at 10 Eastern this morning.

Those who exert the effort to track each and every wave in the market deserve a medal from my perspective. It’s no easy task, the wave counting tends to go back and forth from easy to count (something I can follow) to more complex. Obviously we are in a complex time, but there are some who see us in a wave 4 and so there may be a wave 5 higher to come. McHugh is discussing the possibility of forming a triangle before possibly pushing higher. All I know is that I see huge technical divergences and a market far over extended and in the process of topping. I also see intervention galore – they don’t even hide it anymore, much less deny it. The intervention is occurring directly in the debt markets and in the currency markets, the stock market isn’t even a market, it’s a simulation. If you want to know where we are, that’s it in a nutshell. The game continues for now, the technical picture is the same from my perspective.

Wednesday, October 20, 2010

Equity futures have rebounded some overnight, retracing approximately half of yesterday’s decline before settling near the 38.2% retracement. The dollar and bonds are both down, while oil and gold are both up slightly. Yesterday’s sell off in oil was something, it lost $4 in dramatic fashion to break the range it had been in, closing back beneath the $80 mark (now just below $81).

The hypocritical MBA released its completely worthless Purchase Applications Index this morning for the week prior, clearly showing that foreclosuregate may be affecting people’s psyche – we know that it’s directly impacting foreclosures which had been largely halted. The Purchase Applications Index fell 6.7%, while the Refinancing Index fell 11.2% pushing the composite index down 10.5% for the week – here’s Econoday:

HighlightsPurchase applications fell steeply for a second straight week, down 6.7 percent in the October 15 week following an 8.5 percent drop in the prior week. The declines point to new trouble for the housing market where indications had finally started to stabilize. Refinancing applications swung 11.2 percent lower following the prior week's 21.0 percent jump. Rates popped back up in the week, 13 basis points higher for 30-year fixed mortgages to an average 4.34 percent.

Watching sales plummet even further into the abyss is very likely to garner more attention and focus on the problems of securitization. Banks like Wells Fargo and Bank of America are trying to pretend that a problem doesn’t exist, but it does and it is very likely that the two who are in public denial are the very two who are least likely to survive the fallout.

First, let’s get something straight about the stock market… Stocks are not going anywhere without the financials going along for the ride. Once again, the truth is that nothing was ever “fixed,” no real problem was solved, none. Below is a chart showing the POMO’ed, pumped up, and fluffed up SPX (black line) versus the BANK index. Note the huge divergence since the April top - $BANK shows it, the XLF shows it, and $BKX shows it. And this is despite the trillions used to bail the banks out and the near daily swaps that allow the banks to offload their crap on the American public:

What occurred in 2008 was NOT just a “bank panic,” it was simply the first major tremor of a completely insolvent, fraudulent, and morally bankrupt financial system. We are very likely to wind up with more major bank failures and as I’ve been saying all along, nothing will truly be solved until we cure our systemic debt saturated condition.

This whole bank mess has turned into a surreal and bizarre affair. Yesterday the New York Fed along with PIMCO and BlackRock announced they are filing suit against Bank of America in an attempt to get them to repurchase Mortgage Backed Securities (MBS) that have turned bad. The irony of this lawsuit runs as long as the river Nile. For starters, BlackRock just happens to OWN 5.35% of BAC, they are the largest shareholder of Bank of America! Thus they are in effect suing themselves!?! But wait, BAC also happens to be the largest owner in BlackRock with a huge 34% – 47% stake, depending upon the source cited. And if that relationship isn’t bizarre enough, consider that the New York “Fed” is really a private institution that is owned by the banks, the largest shareholders of the “Fed” are the large Primary Dealers of which BAC is one of the biggest! In short, BAC also owns a portion of the New York Fed.

This incestuous relationship is not a minor point, nor did it come about by accident. There are very serious games afoot here and ultimately I believe that this suit is most likely some sort of distraction that is leading ultimately to the sacrifice of another institution or two and most likely is a setup for another round of public fleecing by these private criminals who are absolutely robbing America blind. Don’t be fooled for a second into believing they are finally doing the right thing – absolutely not fooling me. Just look at the fact that PIMCO has been buying up MBS over the past couple of months while simultaneously talking about overpriced treasuries. Connect the dots and you will see that something contrived is occurring and that it is leading somewhere… where? I’ll bet we find out at the height of fear – again.

So how exactly does that work, owning one another like that? Is it okay for me to create “Nate, Inc.” and sell you stock which you buy through issuing your own “You, Inc.” stock? In other words, we could simply do a stock swap and both claim to be worth whatever we want? Is that okay?

Will we ever learn the lesson that what’s most important in nearly all aspects of running a country is WHO controls the power to create the supply of money? Sigh.

This issue of foreclosure title handling is simply the tip of a HUGE iceberg that can and probably will wind up involving nearly every retirement fund and investor who has purchased MBS. In fact, it will run to the entire spectrum of how debt is securitized – all MBS, plus securitized Commercial Real Estate debt, Auto debt, credit card debt, all of it.

And the markets are so broken that the people have fled in huge groves. Market volumes are down so low that it is damaging the largest profit (fraud) centers of the banks. Just look at Morgan Stanley’s earnings report that just came out:

Third-quarter profits fell 67% from a year ago, Morgan Stanley (MS) said Wednesday morning. The culprit: weak volume in the trading businesses that only a year ago were fueling Wall Street's resurgence.

Morgan Stanley made $313 million, or 5 cents a share, from continuing operations for the quarter ended Sept. 30. That compares with a year-ago profit of $936 million, or 50 cents a share. Revenue tumbled 20% from a year ago, to $6.8 billion.

Even that modest profit was bolstered by a tax gain, without which the firm would have lost 7 cents a share for the latest quarter.

Analysts surveyed by Thomson Financial were looking for a 15-cent profit at Morgan Stanley. But Wall Street's profit expectations for Morgan Stanley and Goldman Sachs (GS), which reported a 40% earnings decline Tuesday, have been falling sharply for about three months.

Once again proof that you cannot fool all of the people all of the time. Their schemes will in the end prove to only lead to their own demise – they are the fools, they have lost all perspective on right and wrong and the people have mistakenly let them.

Note again that here we have a company who actually LOST MONEY yet is claiming to have positive earnings "ex-items." Again, those who buy into this "operational earnings" nonsense are going to be spanked for failing to understand how the markets and valuations are being spun!

And if you want to be completely insulted by the spin from yet another Warren Buffett company, read this regarding Wells Fargo’s earnings release:

NEW YORK (CNNMoney.com) -- Wells Fargo reported its highest quarterly profit ever Wednesday, and said its "sound and accurate" practices meant it does not need a freeze on foreclosures.

Third-quarter earnings for the bank came in at $3.34 billion, or 60 cents per share, compared to $3.24 billion, or 56 cents, a year earlier.

… In its release, the bank reiterated that it has no plans to institute a foreclosure moratorium because its "practices, procedures and documentation" in its housing business are sound.

Uh, huh… all I will say is that it will be my pleasure watching them fall. And speaking of that, below is a chart of MS on the left and WFC on the right and you can see the reactions to these releases on this 5 minute chart:

And to those who think the world is going to go on a hyperinflationary tear, I present very clear evidence that wave C mentality, in Britain at least, is going to temporarily push aside any such thought:

Osborne Deficit Cuts to Slash Jobs, Levy Banks, Curb Debt Costs

(Bloomberg) -- Chancellor of the Exchequer George Osborne detailed the deepest budget cuts ever in Britain, eliminating 500,000 public-sector jobs and imposing a levy on banks to extract the “maximum sustainable” revenue.

“Today’s the day when Britain steps back from the brink,” Osborne told lawmakers in the House of Commons in London today as he outlined plans to virtually eliminate a 156 billion-pound ($245 billion) budget deficit. It’s “a day of rebuilding when we set out a four-year plan to put our public services and welfare state on a sustainable footing.”

Half a million government jobs? That sounds like a very good start, and it will certainly prevent wage pressures from fueling inflation in that part of the world.

Yesterday’s selling did do technical damage to the markets. Breadth on the upside is rapidly narrowing, while volumes on the down strokes are increasing. The McClelland Oscillator went negative once again, and were it not for today being another POMO day, I would say that the odds of follow-through on the downside is high. But since today is a POMO/ rob Americans blind day, that puts the short term movement into the hands of the criminals who all own one another, they own the HFT machines, they own the exchanges, they own the politicians, and they likely “own” you too via their fraudulent paper.

Tuesday, October 19, 2010

Equity futures are down hard this morning following earning reports from IBM and Apple that were not wow enough for a market priced to the planet Mars. The dollar is up strongly, bonds are down, oil and gold are both also down.

Housing Starts for September came in slightly higher than August at 610,000 units, up from 598,000. The consensus was looking for 580k. All these levels are depression era levels compared to when the economy was actually growing (no, it’s not growing now, the only thing that’s growing is our propensity to yak, print money, and to falsify statistics). What’s even worse than these depression levels of starts is the fact that permits fell from 569k to only 539k, but a decrease in permits heading into the winter months is certainly not unexpected. Here’s Econospin:

HighlightsHousing starts surprised on the upside while permits went in the other direction. Importantly, the single-family component is the one showing unexpected modest strength. Housing starts in September rose 0.3 percent after jumping 10.5 percent the prior month. The September annualized pace of 0.610 million units came in significantly above the market forecast for 0.580 million units and is up 4.1 percent on a year-ago basis. The boost in September was led by a 4.4 percent gain in single-family starts, following a 1.4 percent rise in August. The multifamily component dropped 9.7 percent after spiking 42.3 percent in August.

Permits fell back in the latest month, declining 5.6 percent after rebounding 2.1 percent in August. Weakness was in the multifamily component as single-family permits edged up in the latest month. Overall permits came in at an annualized rate of 0.539 million units and are down 10.9 percent on a year-ago basis.

Today's report indicates that housing may have hit its post-tax credits bottom. The multifamily component for starts has been a lot more volatile than usual but the single-family component is somewhat encouraging with two consecutive monthly gains. However, the level remains quite weak.

LOL, yet another “bottom” call, love it! How one can even say that word based on that report is far beyond me – but the fact that people are still clinging to hope is the very indicator to me that a true bottom is still a ways off. This is because true bottoms are marked by fear, despair, and hopelessness.

This morning several of the banks reported. Like Citigroup, Goldman’s numbers were down across the board yet they “beat” estimates, “earning” *only* $1.9 billion for the quarter (the word 'earnings' when mentioned within the context of any of the primary dealers is presented in quotes to denote that I actually mean ‘stealing’ or otherwise ‘falsifying’).

Speaking of falsifying, Bank of America announced yesterday that it had audited itself in regards to foreclosures giving itself a good bill of health and announcing that it is resuming foreclosures! Then this morning they announce that they lost a “meager” $7.3 Billion in the last quarter, more than wiping out all the falsified earnings of its competitors reported so far! Their proclamation of health is obviously a strategy of ignore and hope that nobody calls them on it. And that’s probably a good gamble for them because they certainly can’t afford to handle reality, so pretending and hoping that no cops show up is a good call for them! Why not? There are no cops. That’s been proven time and again over the past several years. This is like the gangsters who shoot somebody in public in broad daylight – they look at the people who witness their crime and dare them to do something about it, knowing that they won’t and that the cops are on the take. The truth, of course, is that every loan processed through MERS is probably not legal because they bypassed state law. Can you imagine just up and creating your own systems to ignore the state laws? That takes some mega hubris.

And speaking of hubris, BAC's earnings are a great example of a company that reports positive earnings "ex-items." Despite losing $7.3 Billion for the quarter, just look at what is being reported: "Dow component Bank of America Corp. (BAC $12 1) posted 3Q profits ex-items of $0.27 per share, eleven cents above the consensus estimate..."

LOL, a "beat" and POSITIVE EARNINGS despite LOSING $7.3 Billion!!!

The pump monkeys on Wall Street call this "operating earnings" and they will tell you that P/E ratios based upon those earnings are great, never been a better time to buy. It's all FRAUD, there are no accounting cops.

But now it’s time for the market to come down from orbit and return to the land of reality. Key levels like 1170 and then 1150 have to fall, but it’s looking very much like a top has finally been put in. I say that not based upon broken support (which still needs to fall), but based upon the reaction to earnings. It’s all priced in, all of it – perfect earnings, daily POMOs, QE666, all of it. Of course this morning’s open is going to cause a large gap, and all gaps get filled, so don’t panic when it does. There are so many gaps on the charts that it’s not even funny – they will all fill.

For those not paying attention there was yet another flash crash yesterday. This time it occurred in the SPY and more than half a billion dollars worth of trades was undone by the exchange. This is simply more proof that the ratio of computer to human trades is so far gone that you can’t even call it a marketplace, it’s more of a simulationplace. If this lowers your confidence in the market, your reaction is appropriate, it should.

All the divergences I’ve been pointing out over the past few weeks are only growing larger. Yesterday was a big divergence as the number of new 52 week highs fell dramatically despite higher price. Again, this shows a narrowing breadth, the size of these divergences is historic. I believe we have very likely seen the end of wave 2, but again we need to see key support levels fall.

For those who like a good laugh, I’ll simply leave you with quotes from little Timothy Geither:

Geithner: U.S. will not engage in dollar devaluation

(Reuters) - U.S. Treasury Secretary Timothy Geithner on Monday sought to ease fears the United States was actively weakening the dollar to gain an export edge, saying no country could devalue its way to health.

"It is not going to happen in this country." Geithner said of dollar devaluation to Silicon Valley business leaders here.

"It is very important for people to understand that the United States of America and no country around the world can devalue its way to prosperity, to (be) competitive," Geithner added. "It is not a viable, feasible strategy and we will not engage in it."

Geithner broke his silence on the dollar's slide in recent weeks as the Federal Reserve considers more monetary easing. In response to audience questions from the Commonwealth Club of California, he said the United States needed to "work hard to preserve confidence in the strong dollar."

After being down sharply, equity futures have of course recovered to about even in the premarket on this HFT controlled POMO fueled Monday morning. The dollar is higher, bonds are higher, oil is higher, and gold is lower.

Citigroup – as messed up as that company is – managed to “earn” $2.17 billion in past quarter, thus magically beating estimates. This was accomplished in large part “as the company reduced loan-loss reserves by $1.99 billion.” They say the reduced loan-loss provisions are due to “improving credit conditions.” LOL, I’d like to know which improvement they are referring to, because frankly that’s just an outright lie. Once again it’s all in the accounting and we have no idea what their models are marking to what fantasy. The government doesn’t care, they just look the other way as long as there’s no crisis TODAY.

NEW YORK (CNNMoney.com) -- Just because a lender screwed up your foreclosure paperwork doesn't mean that you get to stay in your house for free.

Of course, plenty of enterprising lawyers will try to tell distraught homeowners otherwise.

But the best that most delinquent borrowers can hope for is that the current flap over foreclosure documents will prompt financial institutions to grant more affordable loan modifications, experts said.

Even if the banks didn't have the paperwork required to foreclose, "that doesn't mean you'll get a free house at the end of the day," said Ira Rheingold, head of the National Association of Consumer Advocates. "There is no panacea here."

… Meanwhile, lots of lawyers are trying to capitalize on the confusion by promoting their foreclosure rescue services to troubled borrowers. But homeowners should beware of scams, Rheingold said, because if you can't make your payments, they ultimately can't help you.

Now why do you suppose a story like this would get planted in a mainstream media source? Of course it’s because they want to try to scare people into keeping up their payments, they don’t want a mass exodus of debt slaves. It’s all just a paperwork problem according to articles like this, it’s not that big of a deal, it’ll all get worked out… This type of thing is exactly how the few individuals who control the production of our money use the media in an attempt to control our minds through THEIR media outlets. If you aren’t a debt pusher, you are not a part of their club.

Treasury International Capital flows for August came in positive for the second month in a row at $38.9 Billion. This compares to July’s net inflow of a supposed $63.3 Billion. I have to say that with our $40 billion monthly deficits and bond auctions that are sucking the life out of the planet, that there is definitely some creative accounting going on over at the Treasury department. Foreign purchases of $128.7 Billion? “Net foreign acquisition of long-term securities, taking into account adjustments, is estimated to have been $111.8 Billion.” Hmmm… I’ll have to dig deeper and report back on this one, but in the meantime the report is here:

Industrial Production for September fell by .2% following Augusts’ rise of .2%. The consensus was looking for an additional .2% rise. Here’s Econohope:

HighlightsIndustrial production was disappointing in September, declining 0.2 percent, following a 0.2 percent gain in August. The September decrease came in notably below analysts' median projection for a 0.2 percent advance.

By major components, manufacturing dipped 0.2 percent after a 0.1 uptick in August. Assemblies of motor vehicles & parts, however, provided some lift, rebounding 0.5 percent, following a 6.3 percent drop in August. Excluding motor vehicles, manufacturing posted a 0.2 percent decline in September, following a 0.5 percent boost the prior month.

The latest production numbers show manufacturing to be on the weak side. However, that may be temporary as a weaker dollar will likely boost exports. Also, the latest Empire State manufacturing survey for October was notably more positive. And durable goods orders excluding transportation picked up recently.

Falling production, falling capacity utilization. Not to worry as trashing the dollar will supposedly make it all better (as measured in dollars that are worth less). No, sorry, but killing the dollar will accomplish nothing other than to completely sink America’s workers into the abyss.

Which brings us to QE2 or QE100, whatever… this is an economy destroying move. The larger the QE, the faster and harder the economy will fall. Each effort to print money will simply make living that much harder for people whose incomes cannot rise. This will torpedo corporate earnings for all companies other than the financials partaking in the fraud. Now, should they QE and use it to help eliminate the people’s debts, THEN you would have something that moves the economy forward. But when is that going to happen? Never of course, the narcissists are still in control… for now, but their actions are eventually going to lead to their ouster.

The Housing Market Index is released at 10 Eastern this morning. While this release probably won’t show much further deterioration from the already disastrous housing market, I am very concerned that foreclosuregate could easily cause very large future deterioration in home sales, both due to falling foreclosure sales, but also due to concern over purchasing a home with a potentially defective title. It certainly won’t help.

And foreclosuregate certainly won’t help the banks. Investors who have been burned by the fraud produced by the banks are already getting more aggressive in their stance and are taking legal action against the banks. Of course the banks are not going to be able to make investors whole in the end, so this absolutely has the potential to derail the flow of credit. Just take a look at bank stocks and how they performed at the end of last week. The XLF is a huge drag on the market, and the only upside momentum left is in basically three momo tech stocks. But Apple and Google do not an economy or stock market make, and a very narrow based advance can most certainly not sustain overall rising prices forever.

The dollar appears to have found support right at the 76 level I had been showing and forecasting. The Euro also appears to have begun correcting its rise, but the Yen continues to strengthen for now. This could be short lived, but what happens with the currencies will most definitely influence the markets in the short run.

On Friday the McClelland Oscillator turned negative again, when this is negative, it does set up the potential for further downside momentum. Of course these real negative forces are being fought tooth and nail by fake forces like POMOs and currency interventions. Those interventions cannot be the basis of a market for long and I fail to see an exit strategy here. That means that they attempt and attempt until they just flat out fail. This is exactly what happened/ is happening in Japan.

I was looking at the long term charts again this weekend and want to note something that I think is quite significant. Most people never look at the YEARLY charts (each candle is one year), but when you look at both the DOW and SPX you see a massive negative RSI divergence. On the DOW, for example, we are almost to the height of the left shoulder around the year 1999, and yet the RSI is far below where it was at that peak.

The same divergence can be seen on the quarterly charts as well and the SPX was also divergent on the 2007 peak and that has still not been resolved. These divergences are a huge problem for those who believe the markets are going to move significantly higher. The fact remains that the biggest credit bubble in history is collapsing. It takes long time frames to resolve them, and this one most certainly has not been resolved.

In the meantime the Monday morning ramp continues its “win” streak, grinding out phony profits for the banks who own the HFT machines, they own the exchanges, they buy their own accounting rules, and they tell you that black is white via their media outlets. Oh yeah, Osama is living in a house in Pakistan and al-Zawahiri is his neighbor – queue up the bank’s military industrial complex!

Sunday, October 17, 2010

Nate here - Lately I’ve been talking again about the insolvency of the major banks and how their “assets” have been built largely upon fraud and Mark-to-Model (fantasy) accounting. It is absolutely Enron times a million. This is a Ponzi scheme because it requires ever increasing quantities of new cash to keep it going. It collapses when new cash can no longer service the fantasy that’s been created and passed off to investors. No cash flow, no fantasy.

But that doesn’t stop those who try to justify holding derivatives and mortgages at a model price that is based on default rates and prices of bubble years gone by. Obviously the bubble has burst, but these models are used to avoid taking losses. Losses are in fact so huge that should the banks be forced to mark their “assets” to their current value they would be quite literally unable to claim positive net worth. In fact cash flows have already completely collapsed, that is exactly what the crisis of 2008 was about. The interim “solution” has been to allow the banks to exchange those “assets” to the Fed in exchange for cash (cash backed by the people’s future earnings). Call it whatever you want, Quantitative Easing, Permanent Open Market Operation (POMO), whatever… it’s all the same, and its purpose is two fold: First is to create the illusion of cash flow so that the Ponzi doesn’t collapse, and the second is to artificially buy down interest rates.

But accounting fraud isn’t just a bank thing; it is rampant throughout corporate America. It’s Enron times a Billion.

Corporate “earnings” have become nothing short of a marketing event. “Expectations” are managed not by professional financiers, but instead by marketing professionals who are often promoted to the very top ranks of corporations – CEO’s, for example, now often have marketing expertise as it is more highly valued in this era of spin than is real operational expertise. Why shouldn’t it be? Corporations can set expectations as desired and always “beat” those expectations by using tricks such as reporting “operating earnings” that exclude “one time” events. Of course these one time events occur every single quarter. The financial media spins these expectations to investors who have bought off on the concept that it’s the “beat” that matters, not the actual performance. The industry further spins valuations basing them on some FORWARD looking model – in other words earnings models based upon the performance of financially engineered mark-to-fantasy models.

How much of an influence is this? The chart below is a chart from the “Federal” Reserve Bank of St. Louis illustrating total Corporate Profits After Tax. Note that profits went parabolic as derivatives and Mark-to-Model accounting exploded. Then in September, 2007 FASB (Financial Accounting Standards Board) instated rule 157 known as “fair value accounting,” or what is referred to as Mark-to-Market. Note what happened to corporate profits during this time! Then in 2009 under pressure from the banks, Congress, in turn, pressured the FASB to reinstate Mark-to Model accounting – and just look at corporate “profits” as a result!

Below you can see a chart of Corporate Profits After Tax compared to the S&P 500 price in red:

This same effect can be seen when looking at trailing price to earnings ratio, the only P/E ratio that matters and has been used consistently up until the modern era of spin. Note how Mark-to-Market accounting revealed the true valuation of the market! Then Mark-to-Fantasy is reinstated and the true value of the market is again hidden to obscure reality:

While I’m not an accountant, I have a lot of accounting experience and have had training in the field. What I also have is experience in the military, in my own businesses and investments, and also working in a large corporate environment. My military and corporate experiences opened my eyes to the way the world really works at this point in time. Let’s just say that I have moral and ethical problems with the way things are going. That’s why it’s nice to read a realistic personal report from someone who is an accounting professional and who also possesses a moral compass! Hopefully the next time you are reading a corporate annual report or are being bombarded with what a great value the market is, or how XYZ “beat” the street, you will understand that it is a professionally spun game that may not be entirely on the up and up…

I've lived though more than five decades thinking that people are basically decent but after all that has happened and the many facts that have come to light in recent years, I guess I'm pretty naive.

Indeed, a post by Charles Hugh Smith, author of Survival+: Structuring Prosperity for Yourself and the Nation and publisher of the Of Two Minds blog, entitled "The Rot Within: Our Culture of Financial Fraud and the Anger of the Honest," features commentary by an accountant with decades of experience in high-level global consulting firms and Fortune 50 U.S. corporations that suggests things have truly reached a low point.

"I belong to a large number of finance organizations and sometimes I even assist clients with hiring a finance person. Since I have a lot of experience with finance and accounting, when I am interviewing these people I know when I am getting a BS answer and unlike most BS recruiters I do not steer away from controversy since I am truly looking for the most qualified for my clients and not who is just most marketable to them. After I start drilling down you would be amazed (or maybe you wouldn’t) how many of these CFO’s and Controller types were basically dismissed because they would not cook the books in some manner.

Now maybe I have told you that I was asked to resign from one of the nations largest companies (a company that I worked hard for and saved from bankruptcy and due to my actions had created) in the US because I refused to book a revenue entry for over a million dollars which was unsupported and the CFO (I had been the CFO up until a merger) blew up with me when I asked him to send a memo telling me to record it. Funny, a few years and one acquisition later it melted down as one of the biggest accounting frauds in US history.

My next gig as the CFO for a NYSE company I basically walked in and found what I would consider a $60 million dollar accounting fraud in one day (once again a mark to market issue draining cash flow and sucking the company into a dark hole). Corrected that accounting problem and the company began to prosper but since I thought the board and upper management was so corrupt I left (Chairman of the Audit Committee was found guilty at another large company for back dating options).

The next public company where not only was I the CFO but prior to that a board member, I was basically asked to resign for BS reasons a couple of weeks later after I pointed out what the board was asking me to do was basically wire fraud and of course they backed off quickly and said they would get a legal opinion from our law firm (one of the top 10 in the US) to cover me. In the same meeting our outside legal counsel said he had a problem giving such an opinion and I pointed out that a legal opinion did not keep me from being both civil and criminally liable. It should be noted that this was another company that 2 years before I came in and took the reins as CFO/COO and pulled the company out of black hole of looming bankruptcy and made it profitable in the first time in its history since it went public and then refinanced the company. In summary a year after I left the company had burned through the money I raised and the Board sold the company for nothing.

There is lots of bitterness out there with the straight shooting finance people. Many of them find themselves unemployable. This stretches from banks, Private Equity, Investment Banking, through the large accounting firms (the average partner in the large accounting firms any more is a pathological liar) to senior finance people in organizations. Right before Enron and MCI blew-up, I actually had a BS HR person tell me I was not flexible enough. I wanted to tell this idiot that I knew where flexibility got me and it was an orange jumpsuit. Bankers and Companies only hire the weakest and most pliable senior finance executives they can find.

One other short story. A while back I was at a networking meeting with a large group of CFO and ex-CFO’s. I asked this group how many thought that most CEO’s wanted a weak CFO working for them. Approximately 70% of the attendees raised their hand! You have to remember that the only person who had steady access to the Board is the CFO.

The point, the middle class is becoming torn and frayed and there is real anger out there. The common belief is that only the liars and thieves are moving ahead in this country."

Michael J. Panzner is a 25-year veteran of the global stock, bond, and currency markets who has worked in New York and London for such leading companies as HSBC, Soros Funds, ABN Amro, Dresdner Bank, and J.P. Morgan Chase. He is the author of When Giants Fall: An Economic Roadmap for the End of the American Era, Financial Armageddon: Protecting Your Future from Four Impending Catastrophes, and The New Laws of the Stock Market Jungle: An Insider’s Guide to Successful Investing in a Changing World. He has also been a columnist at TheStreet.com’s RealMoney paid-subscription service and a contributor to AOL’s BloggingStocks.com. Panzner has appeared on or been quoted by CNBC, Bloomberg, The Wall Street Journal, USA Today, Barron's, Reuters, CNN, MarketWatch, BusinessWeek Online, TheStreet.com, Slate, CFO.com, and other print, radio and television outlets. His articles have appeared in Buyside, Stocks, Futures & Options, Management Review, and Business Credit. He is a New York Institute of Finance faculty member specializing in Equities, Trading, Global Capital Markets and Technical Analysis and is a graduate of Columbia University. He regularly speaks to a diverse range of audiences, from small groups of individuals with little specialized knowledge about money matters to gatherings of the world’s top financial professionals, on a variety of economic, business, and investment-related themes.